China’s New Model for Foreign Aid

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China’s New Model for Foreign Aid

A panel data study of the allocation of Chinese official finance in sub-Saharan Africa

Sigri Wind

Master of Philosophy in Economics Department of Economics

University of Oslo

11^th of May 2018

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China’s New Model for Foreign Aid

A panel data study of the allocation of Chinese official

finance in sub-Saharan Africa

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China’s New Model for Foreign Aid: A Panel Data Study of Chinese Official Finance Allocation in sub-Saharan Africa

Sigri Wind

http://www.duo.uio.no

Trykk: Reprosentralen, Universitetet i Oslo

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Abstract

The aim of this paper is to study the allocation of Chinese official finance in sub-Saharan African countries and try to determine whether certain characteristics of the recipient countries are correlated with the share received of Chinese official finance to the region. Further- more, the Chinese aid allocation is also studied in comparison to the OECD countries' aid allocation in sub-Saharan Africa, looking at the same characteristics. The paper makes use of panel data with characteristics from the recipient countries, and runs two GLS random effects models. The panel data set was put together specifically for this paper, using notably Aid- Data's estimations on Chinese official finance.

The regression results indicate that Chinese official aid tends to favour non-democratic countries. On average, disregarding all other country characteristics, a non-democratic country receives a 1 percentage point larger share of total Chinese official aid to sub-Saharan Africa, than a democratic country. Furthermore, there is some indication that China gives a larger share of their official finance to countries that are richer in natural resources. This finding was expected, as China has openly expressed their interest in a mutually beneficial relationship, and their need for raw materials to feed their manufacturing production. The paper also confirms that China does not provide official finance to sub-Saharan African countries that maintain diplomatic relations with Taiwan, which shows there is a political condition to receiving Chinese aid, despite the Chinese claims that they tie no political or social conditions to their foreign aid.

There seems to be some significant differences in the patterns of Chinese foreign aid and the OECD countries’ foreign aid. Relatively to the OECD countries, China seems to give more to countries that are richer, measured in GDP per capita. Hence, one can say that China’s foreign aid is channelled less to countries that are in a direct financial need than the OECD countries’ foreign aid. While the paper find that the OECD countries seem to have a bias towards countries that speak languages that are also spoken in at least one of the OECD countries, no indication of such a language bias was found in the Chinese aid allocation.

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Preface

First and foremost, I would like to express my greatest gratitude to my supervisor Jo Thori Lind for his insight, guidance, and patience.

I would also like to thank my friends and boyfriend for being there, encouraging and making my academic years more enjoyable. Special thanks to Medhi and Gabriela for their help with Stata.

Thank you to my parents who have supported and encouraged me in every way during all of my education.

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List of tables and figures

Tables:

Table 1: Average of share of Chinese official finance to sub-Saharan Africa 2000-2013...…28

Table 2: Summary of statistics……….29

Table 3 (part 1). Allocation of Chinese official finance in sub-Saharan Africa………...34

Table 3 (part 2). Allocation of Chinese official finance in sub-Saharan Africa………...36

Table 4 (part 1). Allocation of Chinese ODA relative to OECD ODA in sub-Saharan Africa.…..38

Table 4 (part 2). Allocation of Chinese ODA relative to OECD ODA in sub-Saharan Africa…...40

Table 5 (part 1). Robustness checks on the standard errors for aidshare………...….44

Table 6 (part 1). Robustness checks for aidshare using two periods………...46

Figures: Figure 1: Financial flows between OECD countries and African countries ………....5

Figure 2: Comparison of official finance composition US and China 2000-2014…...…...…10

Figure 3: Sector allocation of Chinese official finance 2000-2014………...……..11

Figure 4: How Africans evaluate Chinese influence on their country……….15

Figure 5: Chinese official finance to sub-Saharan Africa 2000-2013……….27

Tables in Appendix: Table 5 (part 2): Robustness checks on the standard errors for aidshare……….53

Table 6 (part 2). Robustness checks for aidshare using two periods………...54

Table 7 (part 1): Robustness checks for chinaoecdODA using two periods………55

Table 7 (part 2): Robustness checks for chinaoecdODA using two periods………56

Table 8 (part 1): Robustness checks on the standard errors for chinaoecdODA………..57

Table 8 (part 2): Robustness checks on the standard errors for chinaoecdODA………..58

Table 9: List of missing values……….59

Table 10: Correlation matrix of independent variables………60

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Abbreviations

In this paper, when discussing “China”, it is meant to refer to the People’s Republic of China.

China Ex-Im Bank: The China Export-Import Bank CPI: Corruption Perceptions Index

DAC: Development Assistance Committee FOCAC: Forum for China-Africa Cooperation

OECD: The Organisation for Economic Co-operation and Development ODA: Official Development Aid

OOF: Other Official Finance .

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1 Introduction

As opposed to the traditional Western aid model, we now see the rise of so-called “emerging donors” – aid given to developing countries by emerging countries. This type of South-South cooperation has a different frame than the traditional one. This paper focuses on Chinese foreign aid. While traditional Western aid often comes with social, environmental or political conditions, the Chinese aid does not. The Chinese model claims to tie no political conditions to their foreign aid, to allow the recipient to choose its own development path. Another major difference is that China wants to build a mutually beneficial relationship between donor and recipient, where the donor can gain economic favours or advantages from giving foreign aid, and choose to channel the official finance where they deem it beneficial for themselves too.

This has led to criticism and concerns on China's intentions and influence in the region.

However, there is still little literature on the subject, partially because data on Chinese official finance has long been difficult to obtain.

The Sino-African relationship gained a new platform for collaboration with the establishment of the Forum for China-Africa Cooperation (FOCAC) in 2000. China has expressed great interest in the region, and is today sub-Saharan Africa's top trading partner. Indeed, the two parties have economic complementarities that makes the relationship interesting for both:

sub-Saharan African countries have a deep infrastructural deficit that slows the economic development, and welcome foreign aid and investments; while China on the other hand, has a fast-growing manufacturing production that needs more raw materials than China can produce itself. Having looked North for decades, the African countries now see an opportunity in the East.

There are many possible motivations for providing aid, and this study of Chinese aid allocation will try to investigate if some objective facts can be extracted from the available data.

The aim of this paper is to study the allocation of Chinese official finance in sub-Saharan African countries and try to determine whether certain characteristics of the recipient countries are correlated with the share received of Chinese official finance to the region. Further- more, the Chinese aid allocation is also studied in comparison to the OECD countries' aid allocation in sub-Saharan Africa, looking at the same characteristics. The paper makes use of

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panel data for the years 2000-2013 with characteristics from the recipient countries, and runs two GLS random effects models using the software Stata. The panel dataset was put together specifically for this paper, using notably AidData's estimations on Chinese official finance.

The regression results indicate that Chinese official aid tends to favour non-democratic countries. On average, disregarding all other country characteristics, a non-democratic country receives a 1 percentage point larger share of total Chinese official aid to sub-Saharan Africa, than a democratic country. While China does not tie political conditions to their foreign aid, this does not explain why non-democratic countries receive more than democratic countries.

Furthermore, there is some indication that China gives a larger share of their official finance to countries that are richer in natural resources. This finding was expected, as China has openly expressed their interest in a mutually beneficial relationship, and their need for raw materials to feed their manufacturing production. The paper also confirms that China does not provide official finance to sub-Saharan African countries that maintain diplomatic relations with Taiwan, which shows there is a political condition to receiving Chinese aid, despite the Chinese claims that they tie no political or social conditions to their foreign aid.

There seems to be some significant differences in the patterns of Chinese foreign aid and the OECD countries’ foreign aid. Relatively to the OECD countries, China seems to give more to countries that are richer, measured in GDP per capita. Hence, one can say that China’s foreign aid is channelled less to countries that are in a direct financial need than the OECD countries’ foreign aid. While the paper finds that the OECD countries seem to have a bias towards countries that speak languages that are also spoken in at least one of the OECD countries, no indication of such a language bias was found in the Chinese aid allocation.

The paper is organized in six sections, including the Appendix. The first section consists of this introduction. The second section presents some background on the topic, on motivations for giving foreign aid, and background on the Sino-African relationship. Section three explains how the data was obtained and constructed into a new dataset, and presents the variables and the model. The fourth section shows the regression results, the robustness checks on these results, and also includes a discussion on the findings. Section five concludes the paper.

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2 Background

This section looks both into the general motivations for countries to give foreign aid, as well as Chinese involvement in Africa. The Sino-African relationship is put in a historical context, and discussed from both the African and Chinese perspectives.

2.1 Why do countries give development aid?

There are good statistics on the flows and allocation of development finance from the OECD countries, and multilateral international organizations such as the UN and the World Bank, as they adhere to reporting systems. Analysing the possible motivations for giving development aid, one finds multiple possible reasonings. Many international organizations like the UN or the World Bank state goals like fighting poverty, increasing education, or democracy as their primary goals. These goals can be classified as humanitarian. Emergency aid also fits into this category. However, a donor country can also have other motivations such as gaining strategic advantages in their foreign policy, both directly through bribing or indirectly through an enhanced public opinion; or, counter-intuitively, a country may even gain financial benefits from giving development aid.

The commonly recognized reason for a country to provide assistance, is that developed countries want to help other countries to develop. Reducing poverty, through possible long-term solutions such as financing education (though it is difficult to measure the return of investment in human capital, education is often presented as a long-term solution for fighting poverty, and is often emphasised in development goals (UN Millennium Development Goals, Norway's goals). In Norway's official guidelines for foreign policy, helping the UN achieving their developing goals is one of the main goals (Regjeringen, 2018). The original millennial goals of the UN for 2015 insisted on development – notably achieve universal education - and poverty eradication, as well as protecting the environment, make peace, and work for human rights (United Nations, 2000). Countries then make donations to UN foundations, who work to achieve these goals. For instance, 45% of Norway's foreign aid budget was channelled through multilateral organizations like the UN or the World Bank in 2015 (Norad, 2016). The official goal of the World Bank is to fight global poverty (World Bank, 2006).

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Moreover, many countries finance emergency aid to other countries. Typically, it will go to a country that does not have the resources to handle the aftermath of a natural disaster, there may be famine, or emergency aid will go to people in a temporary precarious situation due to war. Countries channel money directly to the affected country's government, to a multilateral international organisation, or to a national or international help organisation operating in the affected area. For instance, Haiti received substantial emergency aid after the 2010 earthquakes, and Syrians during the ongoing war in Syria. As an example of financing for emergency aid, about 10% of Norway's foreign aid in 2016 went to emergency aid, according to Norad (2017). Specifically, 44% of this amount went to international multilateral organisations, and 52% went to Norwegian non-governmental organisations (Norad, 2018).

The practice of using national organisations from the donor country to administer foreign aid funds will be discussed further down in the section.

Furthermore, there may be less altruistic advantages from humanitarian aid. Difficult living conditions in other countries may increase the probability of receiving refugees, or neighbouring countries may fear a rise in criminality that may cross the borders. In addition, trade opportunities may be affected by other countries economic development. For instance, lack of infrastructure may render the transportation of products more difficult, affecting imports and exports.

Alesina, A. & Dollar, D. (2000) find that former colonial powers seem to have a bias towards their former colonies, showing that historical ties, or maybe some other relationship aspect influences who receives foreign aid, as well.

Countries may benefit financially from giving aid. Multiple studies seem to indicate that donor countries benefit at least as much from their relationship with the recipient countries, as the recipients do. A comprehensive assessment of resource transfers between OECD countries and African countries, by the Centre for Applied Research, Norwegian School of Economics et al. (2015), shows that OECD countries actually receive more from than they give to African countries. Notably, they receive interests on loans, payments on debts, foreigners make profits on investments that they repatriate, capital flight. This challenges the view that OECD countries give aid at loss without any counterpart simply for humanitarian motivations, and shows that the economic relationship between OECD countries and African countries is more complex than just aid donor and aid recipient. This is relevant, as one of the main criticisms against China's involvement in Africa is how Chinese economy benefits and receives counterparts from it (Naìm, 2007).

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Figure 1. Financial flows between OECD countries and African countries

Source: Centre for Applied Research of the Norwegian School of Economics et al. (2015) Development aid is often given through projects, for instance the financing for building a new road or a new school. Often, the contracts for these projects are given to private companies. Previously, we saw that 42% of Norwegian emergency aid in 2016 was channelled through Norwegian non-governmental organisations. In Ellmers (2011), the distribution of development aid money from OECD countries is studied, and he estimates that more than half of the development aid contracts were given to private companies of their own country. The recipient country undoubtedly receives the good itself (a new road, a new school), and the numbers will say that a country has given aid of a certain amount. However, the donor country's economy also gains from this through realising the project; meaning both that donors countries enrich themselves through giving aid, and that the recipient country loses an opportunity to develop its private businesses. The paper brands this type of aid

“boomerang aid”, as part of the money handed out comes back to the donor. One may argue that this can be reasonably explained by better performances and less risk in a country's own companies, but the study finds no correlation between the distribution of contracts and the recipient countries' institutional quality. This practice has been long known. Officially, through the Accra Agenda for Action (AAA, 2008), the goal of the OECD countries has for many years been to reduce this practice. China too gives most of the contracts to Chinese companies, but has no official goal of reducing this practice.

Furthermore, providing foreign aid may give the donor country advantages in their foreign policy. When looking for other countries that may cooperate in the achievement of a country’s foreign policy goals, aid can both be used as a mean of coercion and a mean of

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gaining goodwill. Countries may use aid to bribe countries, for instance to vote in their favour in the UN. Dreher et al. (2008) find that the US seem to use foreign aid as a mean of buying voting compliance in the UN General Assembly; mostly through grants and budget support - financial aid with few restrictions. Furthermore, giving aid seems to give a more subtle strategic advantage. Goldsmith & Horiuchi (2012) find that having a reputation of being a generous donor helps the US get cooperation for their foreign policy “through attraction rather than coercion or payments”. In other words, giving aid helps a country's image; giving aid can serve to enhance the public opinion of a country, which will then serve to facilitate advancing the country's interests. Again, this shows how the nature of the counterpart from giving aid is not always obvious and thus may easily not be taken into account when looking for the motivations of giving aid.

There may be multiple motivations in giving out foreign aid in general. The next subsection will look closer at the relationship between China and sub-Saharan African countries.

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2.2 Chinese aid in sub-Saharan Africa

This section gives an overview over Chinese involvement in Africa, looking at the historical context, the African point of view, and what China has stated officially about its involvement.

2.2.1 Building the Sino-African relationship

Aid allocation is sometimes influenced by historical ties; notably, former colonial powers:

Africans estimate that their former colonial powers are the greatest external influence on their country today (Lekorwe et al., 2016), and former colonial powers have been found to give relatively more to their previous colonies than to other developing countries (Alesina, A. &

Dollar, D. (2000). China did not have any colonies in Africa, and China and the African continent have few historical ties up until modern times. Though trade between some African East coast countries and China did occur, it appears this was only on a small scale (Fage, J.D.

& Oliver, R. (eds.), (2008)). Ivory was in high demand in China, and was shipped from the African East coast as early as the ninth century. On the other hand, third parties (Muslim traders from Indonesia or the Middle East) brought porcelain works and glass beads from China to East coast African countries and Madagascar. Not much is known about this contact, and most of it probably happened through third parties. No traces of contact have been found in inland African countries. Historically there was more contact between the Chinese and Northern African traders, than with sub-Saharan Africans.

Today's relationship started slowly developing after Mao Zedong came to power in 1949. The first time China sent aid to Africa was in 1956 (China's Foreign Aid (2011)). The Cultural Revolution in China, which took place 1966-1976, was a turbulent period for China, where their foreign relations, including with African countries, suffered. However, African countries' votes were crucial when China was accepted into the United Nations in place of Taiwan in 1971, and China provided significant aid in the construction of the 1,860-km-long Tanzania-Zambia railway in the 1970s. Still, China was relatively closed up until 1978, when Deng Xiping came to power and started economic reforms that involved opening up to foreign countries.

Ian Taylor (2011) considers that China has cultivated an image of being the leader of the Third World – not being a developed country, China could identify with developing countries.

During the Cold War, China could offer a more equal alternative partner to the reigning

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Superpowers at the time. Trying to promote a feeling that Third World countries should stand together, China encouraged African countries to resist the power and influence of the Superpowers. By the mid-1980s, China was less interested in cultivating relations with Africa, and concentrated more on the Superpowers. Ian Taylor sees China's desire to stay the leader of the developing world as a motif in their foreign policy decision making, and that one of the ways to maintain this position is to keep strong relations with the other developing countries, especially in Africa. As well as the need for support after the Tiananmen Square incident in 1989, Ian Taylor sees China's renewed interest in connection with the Soviet Union's fall. After the Soviet Union's collapse in the early 1990s, China started looking at African countries as a potential allies to stand against the United States, which at that point was the only Superpower left. Also in the 1990s, China shifted from planned economy to socialist market economy. They also started to facilitate joint ventures and cooperation in other developing countries for Chinese small and medium-sized enterprises (China's Foreign Aid, 2011).

In 2000, China established the Forum on China-Africa Cooperation (FOCAC) in collaboration with African countries. It is a platform for dialogue and collaboration between China and African countries. Summits take place every three years, either in Africa or China.

Ian Taylor (2011, p.1) puts the establishment of the FOCAC in context:

“The existence of FOCAC might be seen as the institutionalization of Sino-African relations at a time of intensified interactions and following a period of exponential growth in such linkages. It is the formalization of relationships which have been long in existence and which can trace their origin back over 50 years.”

Thus, the first FOCAC meeting, in 2000, was the first institutionalized summit between the two parties. Ian Taylor (2011) explains that China wishes to grow a feeling that China should be given privileges in Africa (on access to raw materials) over developed countries – and that FOCAC summits are an opportunity to cultivate this feeling. Raw materials are crucial to China's continued growth. China is the world second-largest oil importer, behind the United States (U.S. Energy Information Administration, 2015). In fact, China is also the world's fourth largest oil producer, but the Chinese oil is expensive to produce relatively to Middle Eastern or African oil, and the Chinese production does not meet Chinese demand.

Furthermore, China's fast-growing economy has a huge demand for other raw materials, such as minerals, for its manufacturing industry. China relies heavily on imports to meet this demand (Gulley et al. (2018).

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Africa is the least developed of all the continents, and needs investments in multiple areas.

The lack of infrastructure is currently a major constraint on African business and productivity, and has been estimated to depress firm productivity by approximately 40% on average for African countries (Escribano et al. 2008). The lack of infrastructure inflates the indirect production costs. This is especially prominent for the lower-income African countries. On the other hand, studies show that the investments made in infrastructure have had a huge positive impact on economic growth in African countries; and these investments have allowed for more than 50% of the economic growth in recent years (African Development Bank, 2013).

Considering the need of China and of African countries together, it paints a picture of an opportunity for a mutually beneficial relationship. These economic complementarities are well described in Foster et al. (2009, p.xiv-xv):

“China has developed one of the world’s largest and most competitive construction industries, with particular expertise in the civil works critical for infrastructure development.

On the other hand, as a result of globalization, China’s fast-growing manufacturing economy is generating major demands for oil and mineral inputs that are rapidly outstripping the country’s domestic resources. Africa is already a major natural resource exporter, and with enhanced infrastructure could develop this potential even further, accelerating economic development in the region.”

2.2.2. Overview over the current Chinese involvement in sub-Saharan Africa

In its own white papers, China presents its involvement in Africa as a new aid model, different from the traditional Western one.

For instance, one can see that the composition of types of official finance used by China, is largely different from the composition of official finance from the OECD countries.¹ China more frequently gives financial support with a lower grant element, which does not meet the definition requirements for ODA. Thus, the majority of Chinese official finance is classified as Other Official Finance (OOF).

1See section 3.1 for an explanation of the different types of official finance.

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Figure 2. Comparison of official finance composition US and China 2000-2014

Source: AidData (2017)

China-funded projects tend to be contracted to Chinese companies that bring Chinese workers to Africa. Hence, China's involvement in Africa creates business opportunities for Chinese companies, in addition to financing developing projects. French (2014) estimates that about 1 million Chinese people have moved to Africa, of which a significant part have come to work on projects funded by China.

In Foster et al. (2009) report “Bulding Bridges”, the use of the «Angola model» for financing infrastructure is explained: it is a repayment model of loans for infrastructure made in terms of natural resources. The China Ex-Im Bank uses this type of deal increasingly, but it’s not a new thing. This type of repayment deal is usually used when the recipient country cannot provide adequate financial guarantees. As previously mentioned, African countries have a significant need for infrastructure. Looking at which type of projects are financed by China, one can see that the majority are linked directly to infrastructure development. China has received criticism for its interest in the recipient country's natural resources, but the Building Bridges report find that «only 10% of Chinese infrastructure finance is directly linked to natural resource exploitation; most of the resources are directed to broader development projects.» Furthermore, the report states that China has provided 780 million dollars of debt relief to African countries in recent years.

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Figure 3. Sector allocation of Chinese official finance 2000-2014

Source: AidData (2017)

2.2.3 China perspective

When considering Chinese foreign aid, the main Chinese institution to consider is the China Ex-Im Bank. Chinese aid is typically channelled through the Chinese ExIm Bank. Foster et al. (2009) report that 92% of the recorded Chinese infrastructure finance commitments in sub-Saharan Africa in 2001-07 were loans from the China Ex-Im Bank. The OECD has some reporting requirements for the Ex-Im Banks of their member countries; however, China is not an OECD member and thus do not follow these. Hence, we do not have as much information on the Chinese Ex-Im Bank’s operations as for other large Ex-Im Banks. For instance, they do not systematically publish data (financial terms, amount spent for each project..) on their overseas loans or grants. However, they have on four occasions published white papers on Chinese foreign aid and investments. They do contain some numbers about Chinese foreign aid. In Chinese Foreign Aid (2011), it is stated that China has provided 256.29 billion yuans in aid to foreign countries, “including 106.2 billion yuan in grants, 76.54 billion yuan in interest-free loans and 73.55 billion yuan in concessional loans” by 2009. However, the paper

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does not state anything on how these numbers are calculated.² “Concessional loans are raised by the Export-Import Bank of China on the market, and since the loan interest is lower than the benchmark interest of the People's Bank of China, the difference is made up by the State as financial subsidies.”

According to this paper, China's motivation for providing foreign aid is that it considers it an international obligation. They consider their foreign aid model as a new one, as they work for a mutually beneficial relationship, and do not tie political conditions to the aid. According to this paper, China began sending aid to Africa both because of a desire to help African countries to win national independence and develop, and also to set the foundation for “future collaborations and good relations”. The paper also defends China against criticism that they replace Western aid, and says international cooperation on foreign aid would be a better alternative than only one model for foreign aid. It presents South-South cooperation as a supplement rather than replacement for South-North cooperation, and also states that China is willing to work with trilateral cooperation, where Western parties are included in the Sino- African relationship “on the basis of respecting the needs of recipient countries and jointly promote the process of global poverty alleviation.”

The first published white paper “China-African Economic and Trade Cooperation” (2010) emphasizes the previously mentioned economic complementarities between Africa and China. While China previously, during the 1980s and 1990s, exported mainly light industrial products, food, and animal by-products, the trade has developed to an export of heavier industrial products since 2000, with machinery, automobiles and electronic items. The paper estimates that more than half of China's exports towards Africa now consists of machinery and electronic products. On the other hand, China imports raw materials such as steel, copper, chemical fertilizers, and also electronic items, from Africa. Furthermore, China helps African countries' export expansion to China by offering the Least Developed Countries (LDCs) of Africa (that have diplomatic relations with China) zero tariffs on some of their exports to China. In addition, China has held African commodity exhibitions, establishing African products exhibition centres in order to promote African products on the Chinese market.

China does not hide its interest in the African continent's natural resources, and points out that “cooperation in resource development is a significant part of China-Africa investment

2This lack of sources is the reason that this paper does not use the numbers given out by China, but rather estimates done by AidData, as discussed in 3.2. In addition, the data provided in the paper do not detail the allocation of these financial transfers.

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cooperation”, with Chinese companies being actively involved in resource development.

However, the paper sees this as an opportunity to transform the richness natural resources into “driving forces of social and economic development”, and that the development already benefits local African industries. It is also emphasized that the Chinese involvement always follows international rules in resource extraction. China attaches particular importance on infrastructure development:

“As backward infrastructure is the bottleneck that hinders the development of many African countries, infrastructure construction is one important aspect of China-Africa economic and trade cooperation. China attaches importance to giving support to African countries to improve their infrastructure, helping them build houses, roads, bridges, railways, airports, ports, telecommunications, power networks, water supply and drainage systems, and hospitals through means such as assistance, project contracting, investment cooperation, and expanding channels of financing, which have positive effects on the development of Africa.”

In regards to the contracting of Chinese companies to realize many of the Chinese aid projects in Africa, the papers states that this happens in a process of competitive bidding, following international norms. There are state-owned enterprises and private Chinese enterprises, of all sizes, and Chinese individuals involved in these types of projects, and China sees these different entities as complementing each other rather than being in competition.

The third white paper, “China-African Economic and Trade Cooperation” (2013) claims that China has become Africa's largest trade partner, with manufacturing being China's key investment field on the continent. As in the first paper, the economic complementarities and the potential of this is emphasized; it's an opportunity for both China and Africa for economic development. Again, China does not hide its intention of also benefit economically from the relationship. In addition to giving aid to specific countries, China also supports African unions' developing projects in Africa; for instance, China supports African Union (AU)’s projects and the African Development Fund (ADF) financially.

The fourth and last white paper, “China's foreign aid” (2014), confirms again that China will not impose political conditions when providing foreign aid. It also points out that China gives out emergency aid to African countries hit by disaster. For instance, they state that they

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provided emergency food aid worth 440 million yuan to the Horn of Africa and the Sahel were after the severe droughts in 2011-2012. This paper also states the importance of China FOCAC as a framework when developing its cooperation with Africa.

While China claims to tie no political conditions to their aid, there is clearly one condition:

adhering to the One-China policy. Taiwan's official name is the Republic of China, and China's official name is the People's Republic of China. They have separate governments, and Taiwan claims itself an independent country; however the One-China policy stipulates that there is only one official China, where Taiwan is a part of China. Adhering to the One-China policy requires that there should be no official ties with Taiwan, as it should be considered a province of China. Official ties with Taiwan would exclude the possibility of having official ties with China. However, some countries, like the US, still maintain unofficial relations with Taiwan. Today, only 22 countries have official diplomatic relations with Taiwan, of which 2 are sub-Saharan (Burkina Faso and Swaziland). Any country maintaining official relations with Taiwan would receive no Chinese aid or investments, and would be unable to engage in trade with China.

2.2.4 African perspective

It is interesting to look at how Africans perceive Chinese aid, and how they perceive it relatively to Western aid. Lekorwe et al. (2016) report of surveys done in 36 African countries by Afrobarometer to evaluate how Chinese aid (as well as US aid, and aid from their former colonial powers) is viewed by the African public. They find that the African public generally has favourable views of Chinese aid and activity in their countries; on average, 63% of Africans think that China has a “somewhat” or “very” positive influence on their country (Figure 4). These numbers are slightly below the numbers for US, and slightly more positive than the numbers for the countries' previous colonial power. China's investments in infrastructure and business development are the main contributing factors to this positive image of Chinese influence and aid. Therefore, it seems that Africans appreciate the different kind of investments that China does compared to OECD countries. However, they surveys also show that Africans have a bad impression of the quality of Chinese products and services.

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Figure 4. How Africans evaluate Chinese influence on their country

Source: Lekorwe et al. (2016)

In African perspectives on China in Africa (Manji, F. & Marks, S. (eds), 2007), multiple African economist discuss Chinese aid in Africa and the Sino-African relationship.

Especially the different approach taken by China is appreciated by the African economists.

What is recurring in the essays is the feeling of being treated more as an equal – to the point where that is possible when one is donor and one recipient. Having an alternative gives more room for manoeuvre, especially considering the sometimes strict political, environmental or social conditions set on traditionally given aid. It is exactly the lack of these conditions tied to aid and investments that make Chinese aid appear less paternalistic. Another common point stressed by the economists is how this new Sino-African relationship is an opportunity for Africa, and a welcome alternative to traditional aid.

Chidaushe, M. writes (p.107):

“The African leadership sees this rekindled relationship as a golden opportunity to escape Western domination and make the West less relevant to Africa.”

Furthermore, African countries are growing sceptical to Western aid, as they are realising that the effects have not been sufficient. Obiorah, N. writes (p.44):

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“For many among Africa's ruled who are physically and intellectually exhausted by two decades of economic 'reform' supposedly adopted by African governments but driven by Western governments, donors and the IFIs, China represents hope that another world is possible in which bread comes before the freedom to vote.”

However, with the opportunity of the relationship, there is also some risk. The economists see China's involvement in Africa as economically driven, specifically as a pursuit of raw materials. However, while China considers its own interests, it remains an opportunity for Africa: China has decided on a policy that may ensure their future growth; and African countries should take this investment money for its future development. Obiorah, N. states the importance of understanding China's interests and motives (p.53):

“The need for Africans to understand China and its motives for engagement with Africa is now greater than ever before. Relatively little is known about China among African civil society actors beyond Western media reportage. At a very minimum, they need to learn more about China as a country and its motives for engaging in Africa in order to develop a feasible agenda for responding to the opportunities and challenges presented by China's increasing engagement in Africa.” African economists are well aware of China's interest in Africa's natural resources. Presents both opportunities and risks for Africa.

Therefore it is important to note that the criticism on Chinese activity in Africa does not necessarily come from Africans themselves. The African economists have little understanding of Western economists' concern over China's involvement in Africa. Kwesi Kwaa Prah writes that he sees Western critics of China's involvement in Africa as hypocritical, considering Western countries' history in Africa; as well as today's practice of subsidizing European (agricultural) products, making African products non-competitive. He calls their concern

“jealousy and rivalry”.

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3 Data

This section presents how the dataset for the paper was built, which sources have been used, and presents the two models used. All the variables of the model are explained.

3.1 Definitions and classifications of aid

When classifying grants and loans, one usually looks at the “grant element” and the

“concessionality level” of it. The relevant terms are defined in the OECD Glossary of Statistical Terms.

Grant element:

«Reflects the financial terms of a commitment: interest rate, maturity and grace period (interval to first repayment of capital). It measures the concessionality of a loan, expressed as the percentage by which the present value of the expected stream of repayments falls short of the repayments that would have been generated at a given reference rate of interest3.»

Concessional loans:

«These are loans that are extended on terms substantially more generous than market loans.

The concessionality is achieved either through interest rates below those available on the market or by grace periods, or a combination of these. Concessional loans typically have long grace periods.»

Concessionality level:

«A measure of the "softness" of a credit reflecting the benefit to the borrower compared to a loan at market rate. Technically, it is calculated as the difference between the nominal value of a tied aid credit and the present value of the debt service as of the date of disbursement, calculated at a discount rate applicable to the currency of the transaction and expressed as a percentage of the nominal value.»

3“The reference rate is 10% in DAC statistics. This rate was selected as a proxy for the marginal efficiency of

the domestic investment, i.e. as an indication of the opportunity cost to the donor of making the funds available.

Thus, the grant element is nil for a loan carrying an interest rate of 10 percent; it is 100 per cent for a grant; and it lies between these two limits for a soft loan. If the face value of a loan is multiplied by its grant element, the result is referred to as the grant equivalent of that loan.”

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The definitions for the specific types of aid are from AidData, as their data, and thus categorization, is used for the regressions.

AidData defines ODA (Official Development Aid) as a grant or a loan which is concessional in terms (the grant element is ≥ 25%), and which is “primarily intended for development and welfare”.

Furthermore, OOF (Other Official Finance) is defined as a loan that is non-concessional in terms (< 25% grant element); and which is “primarily intended for commercial or representational purposes”.

Lastly, Vague Official Finance (Vague OF) is defined as “Clearly Official Finance, but insufficient information to assign to either ODA or OOF”.

According to the OECD Glossary, OECD defines ODA and OA by the same criteria as AidData defines ODA, except the OECD definition includes a criterion that the grant or loan should be undertaken by the official sector. However, the OECD makes a distinction between OA (official aid) and ODA, the only difference between the two being whether the recipient country is on “Part II of the Development Assistance Committee (DAC) List of Aid Recipients”⁴. AidData does not make this distinction, and both ODA and OA flows from the OECD countries fit under the ODA classification of AidData.

4 Which list a country is put on is based on the country's income level – only low and middle income countries can be on the Part I of the list. Once a country has had a high income level for three consecutive years, the country will be removed from the recipient list of ODA. Source: http://www.oecd.org/dac/financing-sustainable- development/development-finance-standards/daclist.htm . In other words, the distinction between ODA and OA from OECD countries lies only in the recipient countries' income level, and not in the financial terms of the flows.

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3.2 Building the dataset

3.2 explains how the dataset is put together, and where the data has been taken from.

3.2.1 Overview

A new dataset has been created for this paper. The panel dataset with 3 periods and 48 countries has been constructed by combining existing datasets and information to get a dataset which covers Chinese aid allocation and characteristics of the recipient countries in sub-Saharan Africa for the period 2000-2013.

The dataset covers the period 2000-2013. These 14 years are shown as three periods in the dataset: 2000-2004, 2005-2009, and 2010-2013. Having three periods allows us the study the variation between periods, but gives more precise data than looking at each year separately. For each period, there are values for each characteristic in the dataset for each country, as well as the amount of aid received by China in that period.

All the sub-Saharan countries are included in the dataset,⁵ except Somalia. Due to the difficult conditions in Somalia, the World Bank has not estimated GDP values for Somalia during the majority of the studied time period. While other missing values in the dataset have been replaced by other estimations, I have chosen to not estimate the GDP for Somalia myself. While it is possible that omitting Somalia in the regression causes a bias, it is also possible that a wrong estimation of the country's GDP would bias the results too, especially due to the number of years missing and the importance of the variable in the regression model.

I have chosen to concentrate on the time period of 2000-2013 in particular for two reasons: Firstly, the first Forum of Chinese-African Cooperation (FOCAC) was held in 2000, and marked a new era of cooperation between China and Africa. Secondly, the dataset was available for this period.

3.2.2. Data on Chinese foreign aid

After WW2, developed countries made a system for tracking foreign aid, and Western aid can today easily be tracked with the OECD's Creditor Reporting System. However, new donors like China do not participate in this reporting system. As China does not provide data

5Appendix on countries that are included in sub-Saharan Africa.

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on their official finance to other countries, I have used AidData's Chinese Official Finance to Africa Dataset 2000-2013 (version 1.2) for data on official finance from China to Sub- Saharan Africa.

AidData is a research lab at the College of William and Mary in Virginia, US, whose mission is to make aid data more accessible and more usable. Their data is not provided by the donor countries, but constructed by AidData using their methodology for tracking under- reported financial flows (TUFF). It consists of two stages. In stage one, the researcher look for general information about potentially relevant projects and flows, searching Factiva (a global news database), the donor countries' governments' information systems, recipient information systems, and Google scholar. In stage two, the researchers will look more closely at a project-level at each of the projects singled out in stage one, gathering data on the project amount, type, and give a description for each project. For this they will conduct Google researches, and in particular read international and local media reports on the projects.

Multiple researchers work on quality checking, confirming the amounts reported, whether the projects have been completed or cancelled, and verifying that projects are not counted more than once. However, as the methodology is not perfect, AidData admits there are probably error and gaps in their data set. Nonetheless, for now their estimations are the best ones available on numbers for Chinese foreign aid. Even assuming the dataset is not perfectly accurate, it provides a good overview on Chinese activity in Sub-Saharan Africa.

3.2.3. Data on recipient country characteristics

Data on GDP, GDP per capita, population, land size in square kilometres, ODA and official aid received from OECD countries, an indicator for the level of political stability, and two different measures of infrastructure (access to electricity and access to clean water) are from the World Bank databank. The two measures of infrastructure have been combined (by average) into one indicator for infrastructure. Some values are missing from the World Bank datasets. For instance, there is no data on the political stability in 2001; this year has been replaced by the average of the years 2000 and 2001. In addition, certain years for the three infrastructure variables are missing. They have been replaced by the following existing value.⁶ Lastly, there is no data for the GDP of Somalia for the whole time series, for Sao

6Please refer to the appendix for a complete table of missing values that have been replaced.

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Tome and Principe in 2000, and for Eritrea 2012-2013. For Eritrea these two years' values have been replaced by the trend from the previous years.

Data on mineral production are from the website of the British Geological Survey Centre for Sustainable Mineral Development, MineralsUK. I have included production of copper, gold, antimony, nickel, iron, aluminium and lithium. These natural resources have been combined to one variable “Natural Resources”, which can take the values 0, 1, 2, 3, 4, 5, or 6. For each of the listed minerals, if a country has a production that is above the average production of that mineral in sub-Saharan Africa, the “Natural Resources” variable will take on one additional point. For example, if a country has an above average production of gold and antimony, and below average production in the other listed minerals, the “Natural Resources” variable will take on the value of 2.

The CIA World Factbook has provided the information regarding the countries' official language(s), previous colonial power, and their geographic position (whether they are on the West coast or East coast). This data has been included through dummy variables for each characteristic.

Data on corruption is taken from the website of the organisation Transparency International. They attribute a score to each country estimating how corrupt their public sectors are. Some observations are missing, but they have then been replaced by the following existing year's value. This should not affect the results, as there is little variation between the years for each country (there is not a single observation where the value changes more than 1 point (out of 10) between two years); the variation is rather seen between countries. There are no observations where the value changes more than 2 points over the whole 13 year period.

For measuring whether a country is democratic or not, I have used a strategy inspired by Acemoglu et al. (2008),⁷ where a country is considered democratic if, for a given year, Freedom house classifies the country as “Free” or “Partially free” and Polity IV assigns the country a positive score. Freedom House does not provide data for 2000 and/or 2001 for certain countries. Acemoglu et al.'s paper includes a table specifying whether countries have switched status, and in which year. Thus, if a country is considered a democracy in 2002 according to my strategy, and is not in the table of switched status for the time period of 1999-2002, I will consider it was also a democracy in 2000 and 2001. Next, Polity IV does

7They were themselves inspired by Papaioannou, E. and Siourounis , G. 2008, “Democratisation and Growth,”

Economic Journal, 118(532), 1520–1551.

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not provide data on Sao Tome & Principe and the Seychelles, so for these two countries only data from Freedom House has been used.

Information on whether countries have diplomatic relations with Taiwan are taken from Hu (2015). Only six countries, Swaziland, Burkina Faso, Gambia, Sao Tome and Principe⁸, Senegal and Liberia recognize Taiwan in the time period of 2000-13; of these, two broke the diplomatic relation with Taiwan during this period (Senegal in 2005 and Liberia in 2003).

Data on crude oil production is taken from EIA Beta, the U.S. Energy Information Administration's website for open data on international energy statistics. Some values in the dataset are slightly negative, and have been changed to 0. This is the case for Kenya, the year 2000 for Mauritania, and the years 2001-09 and 2012-13 for Senegal.

Sudan is dropped in the last period (period 3, 2009-2013) as the country split into [North] Sudan and South Sudan in 2011. Due to dropping Sudan in the last period, the data set is unbalanced.

In order to avoid collinearity, all the variables have been checked for correlation. The correlation matrix appears in the appendix. As a result, “Portugal as a former colonial power”

is dropped from the regression as it is perfectly correlated with having Portuguese as official language. No other variables had a correlation over 0,6.

8Sao Tome and Principe abandoned diplomatic relations with Taiwan in favour of Beijing in 2016. Sources:

www.nytimes.com/2016/12/26/world/asia/china-taiwan-sao-tome-diplomatic-relations.html and http://www.aljazeera.com/news/2016/12/taiwan-slams-sao-tome-decision-cut-diplomatic-ties-

161221084828067.html. It is also interesting to note that the last article cites Taiwan's Foreign Minister David Lee stating Sao Tome and Principe demanded foreign aid in exchange of maintaining their diplomatic relationship.

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3.3 Variables

This section presents the interest of the two dependent variables and the multiple independent variables used in the regressions.

3.3.1 Dependent variables

The paper uses two different dependent variables, that both give a look into how Chinese aid money is allocated. One looks only at Chinese allocation of official finance. The other one considers Chinese aid money allocation relatively to the OECD countries' aid allocation.

aidsharei,t: The share the country i receives of the total Chinese official finance to sub- Saharan Africa t (ODA-like, OOF-like, vague official finance, and official investment) in period t. This is an independent variable that can say something about the correlation between recipient country characteristics and the share of Chinese aid received.

𝑎𝑖𝑑𝑠ℎ𝑎𝑟𝑒_𝑖,𝑡 =𝐶ℎ𝑖𝑛𝑒𝑠𝑒 𝑎𝑖𝑑_𝑖,𝑡 𝐶ℎ𝑖𝑛𝑒𝑠𝑒 𝑎𝑖𝑑_𝑡

chinaoecdODAi,t: The ratio of ODA-like flows from China to the ODA-like flows from OECD countries, to a country i in period t. This is an independent variable that allows to check whether OECD countries and China tend to give according to the same pattern, and say something about which recipient country characteristics China favour relatively to the OECD when allocating ODA.

𝑐ℎ𝑖𝑛𝑎𝑜𝑒𝑐𝑑𝑂𝐷𝐴_𝑖,𝑡 =𝐶ℎ𝑖𝑛𝑒𝑠𝑒 𝑂𝐷𝐴_𝑖,𝑡 𝑂𝐸𝐶𝐷 𝑂𝐷𝐴_𝑖,𝑡

3.3.2 Independent variables

Doucouliagos & Paldam (2007) describe income level and population size as “two of the main factors determining the needs of a country”. Providing aid to countries that are poorer and bigger in population size is a good measure for good intentions. Empirically, however, they find a negative effect of population size on aid share when studying the aid allocation

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literature. They explain this by the disproportionately big power in international organizations that smaller countries have (for instance in the UN): they are simply less costly to bribe.

Buying the influence of a smaller country is cheaper than buying the influence of a big country. This tendency has also gained some evidence in (UN bribe paper). The population size and the income level variables (here measured through GDP per capita) allow us to study whether one can say something about whether Chinese official finance meets actual needs, or maybe if there is a political influence motive behind the financial help.

Size of the country – The model includes a variable for a country's land area in square kilometres, to check whether a country's physical size influences the amount of aid received.

Taiwan - It is obvious from the data and Chinese foreign politics that maintaining diplomatic relations with Taiwan will dramatically reduce the financial transfers from China. This variable serves as a control variable that the model works, and is also important to explain a part of the variation between the countries in the regression models.

Three variables consider the political state of the recipient countries: Democracy, political stability, and corruption level. China has stated that politics should be chosen only by the country itself, and this represents one of the major accusations on Chinese involvement in African countries. Thus, these variables will allow us to look at whether the internal political state of a recipient country is correlated with the Chinese aid allocation; and also whether the Chinese practice actually differs from the one of the OECD countries. Of course, the regression can only say something about the correlation, and nothing about the causality. For instance, some of the criticism on giving aid to non-democratic countries is that this removes an incentive to become a democracy, and thus may perpetuate the country's non-democratic status. In the same line of thought, it is imaginable that the corruption level of a country could be influenced by the amount of aid received just as likely as the other way around. Therefore, these variables are important and interesting to look at, but should be interpreted carefully.

China has stated itself its interest in African raw materials, and a lot of the criticism on China's involvement is also in regards to China's interest in natural resources. Therefore, these two variables may show whether China does actually give more financial help to countries that are rich in natural resources: one that considers endowment in minerals, and one that considers crude oil production.

A country's official language could say something about the facility by which it can communicate with the Chinese - and also with other countries. Having English or another

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European language as an official language, facilitates collaboration with former colonial powers and the US. English is not widely spoken in China, but it is the most common in China among the European languages. Some African countries have only native African official language(s), and these have been put together into one “other official language”

variable, which allows us to consider whether having the same level of difficulty collaborating with the OECD countries and China is reflected in the aid allocation. In addition, Portuguese is both the official language in some of the African countries, and in Macau, one of China's Special Administrative Regions. In China foreign aid (2014), this is mentioned. There have been efforts to establish a “special relationship” between Macau and Portuguese-speaking African countries, since 2003.

Looking at the recipient countries' previous colonial power is especially interesting relatively to the OECD countries, among which multiple members have a past of colonizing African countries. This variable could say something about how close ties to certain former European colonies influences China's interest in the country, for instance.

China has the world's two busiest cargo and container ports (the Port of Shanghai and the Port of Ningbo-Zhoushan), so shipping is a significant part of Chinese trade economy. Whether a country is accessible by sea; and whether a country is located on the African East coast, which is closer to China; could influence the facility by which trade occurs. The two variables in consideration are whether a country is located on the East coast or on the West coast, but these two variables also allow to say something on whether being landlocked influences the aid share. One could either think that being landlocked makes a country less accessible and thus a less attractive partner; or, that exactly the fact that the country is less accessible through shipping routes makes infrastructure investments necessary to make is more accessible – to build access to the ports, as was the case in the 1970s when the 1,860 km long Tanzania-Zambia railway was built (with financial support from China) and gave the landlocked Zambia railway access to the Tanzanian ports.

As seen above, the African continent's economy suffer greatly from the insufficient infrastructure, and investments in infrastructure are a true step in the direction of economic growth for African countries. Good intentions in giving a country aid could be backed up if the donors give to countries that need infrastructure. However, the variable for infrastructure in the regression model is probably not ideal. Ideally, there would be an indicator that clearly

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measures a country's need for infrastructure, but I was unable to find one or estimate one better. Hopefully, the used indicator will at least give some idea on whether the current level of development of a country's infrastructure affects the amount of financial aid received, and whether China and the OECD countries consider this differently.

While the chinaoecdODA dependent variable allows us to compare the aid allocation of China and the OECD countries, the aidshare dependent variable does not. Therefore, the amount of ODA aid received from the OECD countries is added on the independent variables for the aidshare estimations. It says something about whether the OECD countries and China tend to give to the same countries.

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3.4 Descriptive statistics

Below are some descriptive details from the dataset.

Figure 5. Chinese official finance to sub-Saharan Africa 2000-2013

Source: Author's own tabulation from the dataset using Stata 14SE

As one can see, China's official finance to sub-Saharan African countries has increased over the three periods studied, and has more than tripled between 2000-2004 and 2010-2013, reaching just above 15 billion USD for 2010-2013. In addition, by looking at the composition of the official finance, one can see that an increasingly large portion of the official finance becomes difficult to classify, so that it can be attributed neither to ODA or OOF. Provision of all four types of official finance has increased over the period 2000-2013.

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Table 1. Average of share of Chinese official finance to sub-Saharan Africa 2000-2013

Country Aidshare Country Aidshare

Angola 0,24078712 Liberia 0,00091161

Benin 0,0078912 Madagascar 0,00444264

Botswana 0,00114211 Malawi 0,00422479

Burkina Faso 0 Mali 0,01017559

Burundi 0,00082156 Mauritania 0,01108211

Cameroon 0,00696131 Mauritius 0,01545804

Cape Verde 0,00057427 Mozambique 0,01507449

Central African Rep. 0,00215013 Namibia 0,00601263

Chad 0,00077123 Niger 0,00347856

Comoros 0,00108251 Nigeria 0,037598

Congo, Dem. Rep. 0,1463627 Rwanda 0,00226448

Congo, Rep. 0,02247244 Sao Tome & Prin. 0

Cote d’Ivoire 0,02896678 Senegal 0,00555483

Djibouti 0,00339307 Seychelles 0,00109545

Equatorial Guinea 0,01915239 Sierra Leone 0,00125522

Eritrea 0,00472851 Somalia 0,00026928

Ethiopia 0,00738407 South Africa 0,13468379

Gabon 0,00453075 Sudan 0,10691159

Gambia 0 Swaziland 0

Ghana 0,03489682 Tanzania 0,02683319

Guinea 0,00182274 Togo 0,00145907

Guinea-Bissau 0,00238182 Uganda 0,00460774

Kenya 0,00661648 Zambia 0,03542391

Lesotho 0,00097537 Zimbabwe 0,02531758

Source: author’s own tabulation from the dataset

China’s New Model for Foreign Aid

China’s New Model for Foreign Aid

A panel data study of the allocation of Chinese official finance in sub-Saharan Africa

Sigri Wind

Master of Philosophy in Economics Department of Economics

University of Oslo

China’s New Model for Foreign Aid

A panel data study of the allocation of Chinese official

finance in sub-Saharan Africa

Abstract

Preface

Table of contents

List of tables and figures

Abbreviations

1 Introduction

2 Background

2.1 Why do countries give development aid?

2.2 Chinese aid in sub-Saharan Africa

3 Data

3.1 Definitions and classifications of aid

3.2 Building the dataset

3.3 Variables

3.4 Descriptive statistics